New rule capping debit card fees for small businesses could mean customers will pay more

AP Photo/Carolyn KasterA shopper pulls a credit card from her wallet to make a purchase at the checkout in this 2009 file photo. A new rule in effect Friday caps the fees retailers are charged when customers use debit cards for purchases, meaning customers may have to pay more.

A change in the way credit card companies assess merchants for debit card transactions could mean consumers will have to pay more for a cup of coffee or a candy bar.

A rule taking effect Friday places a cap on fees that retailers pay every time a customer swipes his or her debit card. It is intended to put a leash on a cost that has skyrocketed for many businesses. But an unforeseen consequence of it is that merchants whose business primary is in small-ticket items — coffee shops, convenience stores and dry cleaners — may face higher transaction costs as card companies and banks look to recoup lost revenue. Industry watchers say Visa and Mastercard, which set the transaction fees, have indicated they plan to charge merchants the new legal limit in some situations, including small-dollar purchases.

In other words, a $2 cup of coffee that had cost a deli owner a few pennies to transact could end up costing more than 21 cents.

In turn, the deli owner may be forced to pass that cost onto consumers, said John Holub, president of the New Jersey Retail Merchants Association.

"They’ll be paying more for a cup of coffee or a pack of gum."

The rule, passed this summer by the Federal Reserve Board, was required under last year’s Dodd-Frank financial reform law. It caps the fees, known as interchange, that merchants pay major banks for debit transactions. Under the cap, merchants would pay up to 21 cents per debit charge, plus 5 basis points of the ticket — which amounts to an additional 5 cents for every $100 debit charge. The regulation covers major banks and other card issuers carrying more than $10 billion in assets, and it allows these entities to tack on an additional penny per transaction for fraud prevention.

The move will lower significantly the fees merchants pay on bigger transactions. For the average debit card purchase of $38, the interchange fee is now capped at 24 cents. Under the old system, merchants were paying 44 cents on the same transaction, according to the Fed. These rates had been rising over the years and often consume half, if not more, of a small merchant’s profits, according to the office of Sen. Richard Durbin (D-Ill.), who wrote the amendment that resulted in the cap.

Yet in a odd twist, Visa and Mastercard may end up flipping the intent of the new rule on its head. According to retailers and merchant industry groups, the card companies have indicated that, after today, they plan to charge the new legal limit for the smallest debit purchase.

"They’re turning the ceiling into the floor," said Mallory Duncan, general counsel of the National Retail Federation. Merchants are now "seriously reconsidering" whether to continue accepting debit cards, although they will not start planning until the banks that issue the cards communicate to them what the new rates will be, he added.

If rates go up as expected, local merchants may find themselves in a bind.

Agreements with card issuers bar them from imposing minimums for debit card charges, industry officials said. Some have no choice other than to absorb the added cost if they don’t raise prices or stop accepting debit cards.

Kevin Brennan, founder and CEO of Rockn’ Joe, a seven-franchise coffee chain headquartered in Cranford, said he has watched in recent years as debit cards have grown to being used in well over half his company’s transactions. Despite the impact on his business, he does not see steering his customers back to cash.

"We’ve gone to so much of a paperless environment, that’s going to be tough," he said. "People just aren’t carrying the cash."

"If you get a major player (such as a Starbucks or Dunkin’ Donuts) taking that card, how can I be that guy who says we’re going to charge extra for using that card?"

James Smith, chief financial officer for the 127-outlet Quick Chek convenience store chain, said the potential negative impact of higher costs for smaller debit transactions could be balanced by the added savings the company reaps from the cap on bigger receipts, such as fuel-ups at its 31 gas stations. Either way, he said the company will not pass along higher charges to its customers.

"We’re not going to add another penny. It’s the cost of doing business," Smith said.

The anticipated new charges add to the woes of merchants who accept plastic, advocates said. They already pay higher rates for, among other things, processing so-called rewards cards or keying in numbers of cards whose magnetic strips no longer work.

"It’s really eating a lot out of an industry that nets 2 (percent) to 4 percent at the end of the year," said Deborah Dowdell, president of the New Jersey Restaurant Association.

Visa declined to comment on its plans. A Mastercard spokesman said the company "will operate within the debit interchange rates imposed by Congress and the Federal Reserve" on card issuers covered by the regulation, while it will have a different standard for those that are not.

Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents the card companies and issuers, could not comment on Visa or Mastercard’s pricing but said if they "don’t charge the full (21 cents), debit card programs will get even less revenue — further increasing the pain for those of us who own and use debit cards in the form of higher costs."

In fact, Bank of America said Thursday it has plans to charge most users of its debit cards a $5 monthly fee for the privilege, following the lead of other big banks such as Wells Fargo and Chase that have instituted new user fees.

A Federal Reserve spokeswoman declined to comment.

A spokesman for Durbin said the intent of the cap was to help rather than harm consumers and retail businesses.

"Reports of fee increases underscore the anti-competitive nature of the fee-fixing relationship that big banks have with Visa and MasterCard and reaffirms the need for reasonable regulation of the swipe fee system," spokesman Max Glieschman said in an e-mail.